Portfolio Help for Retirees

A funny thing happens to do-it-yourself (DIY) investors when the long march toward financial security is within reach – they start to consider hiring an investment adviser. This is understandable because managing a small sum of money in the early accumulation years is quite different than managing a large sum in retirement. I assure you, with a little help, there’s nothing to worry about.

One out of every two people who have contacted our firm this year is either a pre-retiree do-it-yourself (DIY) investor or a newly retired DIY investor. They’re not asking us about our investment philosophy because they already know we believe in long-term allocations using low-cost index funds. Their questions have to do with distributions, asset allocation, taxes, and whether to continue to managing their portfolio themselves or hire our company to do it for a low fee?

The independent-minded people who contact us have diligently saved during their accumulation years and many are having a big liquidity event that will boost their wealth significantly. As DIY investors, these folks understand the benefits of following a long-term plan, keeping expenses low and not speculating on Wall Street’s flavor-of-the-month. But their lives are changing. They’re about to leave the accumulation phase and enter the “decumulation” phase. This change leads to many questions.

The first set of questions we’re asked typically goes like this:

“Do we have enough?”

“Are we spending too much?”

“How much can we safely take out each year?”

“Is our asset allocation correct?”

Once we help with this first set, the second set goes something like this:

“Which account should we withdraw from first?”

“When do we have to take money from our IRA to avoid penalties?”

“How do taxes play into these decisions?”

“Should we wait to take Social Security?”

And the answer to all those questions is – it depends. It depends on who you are, how much you have, how much you spend, how much you pay in taxes, who else needs your money, and how much you plan to leave others when you’re dead. All these questions must be answered before any money is shifted around in a portfolio.

This article isn’t about answering all these questions. It’s about answering two questions: 1.) Should you hire someone to help answer these questions?, and 2.) Should you hire an adviser to manage your investment portfolio? They are two different questions.

The answer to the first question is usually YES. Give yourself a little piece of mind during this critical transition phase and pay for some good advice. If you’re only interested in advice and not portfolio management, then pay for it by the hour. Mike Piper just wrote an excellent article about how to pay for advice in his Oblivious Investing blog.

The second question about whether to hire an adviser to manage your investment portfolio is what I do for a living. I am an investment adviser and my company, Portfolio Solutions®, manages accounts for individual investors. So, I’m slightly biased. That being said, I am also 100 percent convinced that most people NEED to hire an adviser in retirement, and here is why.

Unfortunately, I have seen man DIY investors make very bad errors in judgment that have had disastrous effects on their retirement accounts. A few of these errors are the result of an unscrupulous broker or other snake-oil salesman. That is a tough mistake to swallow, but it’s not the biggest problem. The biggest error DIY investors make is not what to buy, but when to buy and sell. The consequences for not staying disciplined can be enormous.

DIY investors always have a plan for managing their retirement funds but that doesn’t always stop ships from sinking. Even when there is a good plan in place, and it actually gets fully implemented, it tends to get thrown overboard when the going gets rough. Just think of how many people you know who didn’t stay disciplined during the financial crisis. Millions of investors panicked and shot big holes in their retirement yachts. These people were not careless, they were just unguided. It doesn’t have to happen to you.

Lack of discipline is the single biggest threat to successful portfolio management in retirement for DIY investors and it’s the reason I believe most retirees should hire an investment adviser. Like the captain of a ship, an adviser is paid to keep your portfolio on course in good times and bad. The seas won’t always be calm, buy we’ll always be at the helm, keeping the ship pointed in the right direction. Will you?